The experience of regulation of financial markets in the South African region – part two –

The state of financial markets in the South African region

Until the end of 1994, there were 14 stock exchanges throughout the African continent. These were Cairo (Egypt), Casablanca (Morocco), Tunis (Tunisia) in North Africa; Abidjan (Côte d’Ivoire), Accra (Ghana) and Lagos (Nigeria) in West Africa and Nairobi (Kenya) in East Africa. In the South African region they were Windhoeck (Namibia), Gaborone (Botswana), Johannesburg (South Africa), Port Louis (Mauritius), Lusaka (Zambia), Harare (Zimbabwe) and Mbabane (Swaziland). In 2005, most other Southern African countries developed their own equity markets. They are Maputo (Mozambique), Dar-es-Salam (Tanzania) and Luanda (Angola).

With the exception of the Johannesburg stock exchange and another level, the Zimbabwe stock exchange and the Namibia stock exchange, these markets are too small in comparison to the developed markets in Europe and North America and also to other emerging markets in Asia and Latin America. At the end of 1994, there were approx. 1150 listed companies in the African markets put together. The market capitalization of the listed companies amounted to $ 240 billion for South Africa and approx. $ 25 billion for other African countries.

In the countries considered, stock markets are particularly small in comparison to their economies – with the ratio of market capitalization to GDP averaging 17.3 percent. The limited supply of securities in the markets and the prevailing buying and holding positions of most investors have also contributed to low trading volume and turnover ratios. Revenue is poor, with less than 10 percent of the market capitalization traded annually on most exchanges. The low activation, low trading volume and turnover suggest the embryonic nature of most stock markets in the region.

We have gathered considerable information on the current situation in the financial markets in Africa in general, and due to a limited time frame, it was not possible to sort, analyze and harmonize them. The format of this article cannot allow all data to be considered. From the latest information, it becomes clear that with the ongoing reforms in the financial sectors of the countries studied, a lot of progress has been made in terms of regulation and institutional capacity building. We could expect more results with the promotion of more open investment rules, allowing more financial flows in the region.

The experience of regulating financial markets in the South African countries

The financial systems of the South African countries are characterized by a high ownership structure that results in oligopolistic practices that create privileged access to credit for large companies but limited access to smaller and new businesses. The regulatory framework must take into account all the specific features of these systems and at the same time maintain the general approach associated with any regulatory instrument.

Financial systems in southern Africa are also known for their marked variations. Some systems, such as those in Mozambique, Angola and Tanzania, were dominant state-owned for a long period and consisted mostly of the central bank and very few commercial banks. So far, Angola has not developed a money and capital market, and the informal money markets are widely used. Other systems had mixed ownership consisting of central banks, public, domestic, private and foreign private financial institutions. These can be further divided into those with rich varieties of institutions found in South Africa, Mauritius and Zimbabwe, and others with limited varieties of institutions found in Malawi, Zambia, Swaziland, etc.

Regulators in most of these countries have over the years adopted the policy of financial sector intervention in the hope of promoting economic development. Interest rate controls, directed credit to priority sectors and securing bank loans at lower market rates to fund their activities, were later found to undermine the financial system rather than promote economic growth.

For example, low lending rates encouraged less productive investment and discouraged savers from holding domestic financial assets. Directed credits to priority sectors often resulted in deliberate defaults in the belief that no action could be taken against defaulters. In some cases, subsidized credit almost never reached their intended recipients.

There was also a tendency to concentrate formal financial institutions in urban areas, which made it difficult to give credit to rural people. In some countries, private sector loans were largely crowded with public borrowing. Small businesses often had a lot of difficulty getting funds from formal financial institutions to finance companies. Finally, the tendency of the region’s governments to finance public sector deficits through money creation not only resulted in inflation, but also in negative real interest rates on deposits. These factors had a negative impact on the financial sector. First, savers found it unmatched to invest in financial assets. Second, it generated capital flight among those unable or unwilling to invest in real assets, limiting the financial resources that would be made available for financial intermediation. Along with this was the declining influx of resources to African countries since the 1980s.

A viable financial market can serve to make the financial system more competitive and efficient. Without stock markets, companies have to rely on internal finance through retained earnings. Large and well-established companies, especially the local branches of multinational companies, are in a privileged position because they can make investments from withheld earnings and bank loans, while new indigenous companies do not have easy access to finance. Without being subject to market control, large companies are growing larger.

The availability of reliable information would help investors make comparisons of business performance and long-term prospects; companies to make better investments and strategic decisions; and provide better statistics for economic politicians. Although effective stock markets force companies to compete on an equal footing with investors’ funds, they can be blamed for favoring large companies, suffering from high volatility and focusing on short-term financial returns rather than long-term financial returns.

In various countries where domestic bond markets exist, these are generally dominated by government financing, which suppresses the private sector’s need for fixed-rate financing. With minor exceptions, international fixed-rate bonds are closed to African companies. Thus, the development of an active stock market may be an alternative to the banking system.

The development of financial markets could help to strengthen the capital structure of companies and an efficient and competitive financial system. Companies’ capital structure in the South African countries, where there is no viable stock market, is generally characterized by heavy reliance on internal financing and bank loans, which tend to raise debt / equity ratios. The undercapitalization of companies with high debt / equity ratios tends to lower the viability and solvency of both business and banking, especially during economic downturns.

Case studies in selected countries in southern Africa

In all the countries studied, both the historical background, the evolution of the financial system and the importance of the structure and operations of the financial markets have significantly influenced the nature of the regulatory framework. However, there are few countries whose goal of liberalizing the financial market was the basis for the development of a modern regulatory system. Mauritius and Botswana are examples that, together with South Africa and Zimbabwe, have developed some of the most developed and diversified financial market systems in sub-Saharan Africa. There is no doubt that economic and economic conditions in the economies of individual South African countries have played significant roles in shaping the regulatory framework of their financial markets.

1. Financial markets in Botswana

An informal stock market was established in 1989, which was managed and run by a private stockbroking firm (Stockbrokers Botswana limited). In 1995, a formal stock exchange was established under the Botswana Stock Exchange Act. BSE performed remarkably well in terms of the level of capitalization, the value of the shares and the return on the shares. BSE contributed to the promotion of Botswana as a destination for international investment.

In 2004, the number of listed domestic companies was 18, while the listed foreign companies were 7 and two in the venture capital market. The Bank of Botswana introduced its own paper, BoBCs, since 1991 for liquidity management purposes, and there is a growing secondary market for the instrument. In 1999, the Central Bank introduced other instruments, Repos (Repurchase Agreements) and the national savings certificates, with the aim of developing the local money market and encouraging savings. In 1998, the International Financial Services Center (IFSC) was established to promote world-class financial services.

2. Financial markets in Mauritius

The Government of Mauritius has decided as a priority to modernize and upgrade Mauritius’ financial system and has recently taken measures to strengthen the financial sector and further integrate it with both the domestic economy and the global financial market.

Thanks to a well-developed network of commercial domestic banks, offshore banks, non-financial institutions and financial institutions, the financial system is one of the most vibrant in the South African region.

The Stock Exchange of Mauritius (SEM) started its business in 1989 with only five listed companies. In 2004, more than 44 companies were listed and the activity range has been expanded and the latest technology is being used by the dealers.

In September 2001, the settlement cycle at SEM was reduced from five to three days to be in line with the major international stock markets. The short settlement cycle has since helped to improve liquidity and turnover in the market as investors are able to sell their securities three business days after purchasing, reducing risks and bringing better integration into global markets through strict compliance with international standards.

3. Financial markets in Mozambique

In 1978, all private banks operating in Mozambique were nationalized and merged into two state-owned institutions, the Banco de Mozambique (Central Bank) and the Banco Popular de Desenvolvimento (BPD). Following the adoption of a new economic orientation in 1992, the government implemented an economic reform program including the financial sector reform. Foreign banks were allowed to invest in Mozambique and the regulatory and commercial activities of Central Bank BDM were separated. Banco de Mozambique took over the Central Bank function, while Banco Comercial de Mozambique BCM led the commercial bank.

The liberalization policy for the financial sector allows new institutions. Apart from the already operating Standard Bank, new banks licensed since 1992 or as a result of liquidation of existing institutions include Banco Internacional de Mozambique, Banco Comercial de investimentos, Banco de Fomento, Banco Austral, African Banking Corporation ABC, BMI, UCB , ICB, Novo Banco, etc. There are also investment banks, leasing companies and credit cooperatives. This increased number of financial and non-financial institutions resulted in the development of an active financial sector.

In October 1999, Mozambique’s stock market (Bolsa de Valores de Mozambique BVM) was inaugurated. Its regulatory agency is Central Bank BDM and its activities are still limited. With technical support from the Johannesburg Securities Exchange JSE and the Lisbon Stock Exchange, plans are underway to develop an international financial services center, including an advanced information technology system.

4. Financial markets in Namibia

The Namibian Stock Exchange NSX is subject to the Exchange Control Act of 1985. Amendments to the Act have recently been adopted to bring national laws into line with international standards.

Established in October 1992, NSX is the most technically advanced bourses in Africa, and also one of the few self-regulated financial markets in southern Africa. The Namibian Stock Exchange Association, a self-regulating, non-profit organization, is the custodian for the license to operate NSX. It approves listing of applications, licenses brokers and conducts trading, clearing and settlement of the stock exchange. Since 1998, NSX has used the most technically advanced management tools available on the continent, enabling better monitoring and detailed client protection.

5. Financial markets in South Africa

The South African financial market system is the most sophisticated and complex with the lively Johannesburg Securities Exchange (JSE), South Africa’s Bond Exchange (BESA) and South Africa Futures Exchange (SAFEX).

The Johannesburg Stock Exchange JSE was established in November 1887. It is currently subject to the Exchange Control Act of 1985 [amended in 1998 and 2001]. JSE is the largest stock exchange in Africa and has a market value of more than 10 times the size of all the other African markets combined. The JSE provides technical support and capacity building, skills and information for the following exchanges in the region: Namibia, Mozambique, Mauritius, Tanzania and others in Africa (Nigeria, Ghana, Egypt, Uganda and Kenya). Since 1999, the JSE has harmonized its listing requirements with the stock markets of Botswana, Malawi, Namibia, Zambia and Zimbabwe.

BESA was licensed in May 1996 under the Financial Markets Control Act of 1989 [amended in 1998], and SAFEX was established in 2001 as a financial derivative markets and agricultural products division of the JSE.

In June 1996, JSE introduced the fully automated electronic trading system called Johannesburg Equities Trading (JET) and since May 2002 has been using the Stock Exchange Trading System (SETS).

6. Financial markets in Swaziland

Swaziland Stock Market (SSX) was established in 1990 to promote local investment opportunities. In 2002, five companies were listed. SSX has developed new listing requirements in line with new international regulatory standards. A new security law was passed in 2002 and should be in effect now. It allows licensing and regulation of all securities markets, operations and participants.

7. Financial markets in Tanzania

The Dar Es Salaam Exchange (DSE) was incorporated in September 1996 under the Capital Markets and Securities Act of 1994. However, its operations did not begin until April 1998 with the listing of the first company. In October 2002, foreign companies were allowed to operate on DSE. Its regulatory agency is Capital Markets and Securities Supervision (CMSA). There are plans to facilitate securing increased financial resources from global markets.

8. Financial markets in Zambia

The Lusaka Stock Exchange (LuSE) was established in February 1994 under the Securities Act of 1993. It is controlled by the Securities and Exchange Commission (SEC). Its operations were bolstered by the successful issuance of Zambian Breweries, which raised up to $ 8.5 million to refinance a loan secured for the acquisition of Northern Breweries in 1998. Most of the listings were the result of the country’s privatization program.

The Agricultural Credit Exchange was also established in 1994 as an initiative of the Zambia National Farmers’ Union following the liberalization of agricultural commodity prices. The exchange provides a centralized trading facility for buyers and sellers of raw materials and inputs. It also provides updated prices and some market information for both local and international markets.

9. Financial markets in Zimbabwe

The Zimbabwe Stock Exchange ZSE, is one of the oldest and most vibrant stock exchanges in Africa. It was established in 1890 but had occasional trade until 1946. In 2002, it had 76 listed companies. ZSE operates under the Stock Exchange Act, which is amended to take into account new technological requirements and to adapt the content to international standards (improving the security of stock trading, transparency, central depository system, etc.).

ZSE is open to foreign investors who can buy up to 40 percent of the listed company’s equity, a single investor can buy a maximum of 10 percent of the shares offered. Foreign investors can invest in the local money market up to a maximum of 25 per cent. Primary issues of government bonds and equities, and a single investor can acquire a maximum of 5 percent. Foreign investors, however, are not allowed to buy from the secondary market. These investments qualify for 100 percent dividend and interest registration.

Regulation of financial markets in southern Africa: which way to go?

The main issue in the regulation of the financial market lies in the fact that in most countries the legal and institutional framework is still insufficient to support modern financial processes. Examples of such inadequacy include outdated legal systems that lead to poor law enforcement. The following challenges are very interesting for further research opportunities.

A coherent and comprehensive legal framework is required under the proactive approach of using the contracts that clearly define the rights and obligations of all intermediate operators. Such a framework should encourage discipline and timely enforcement of contracts, create responsibility and prudent behavior on both sides of financial transactions. Cautious and effective financial intermediation cannot work without reliable information about borrowers, and some legislation on accounting and auditing standards, which also ensures the honesty of financial institutions. Similarly, for a country’s financial markets to evolve and operate effectively, legislation should fully integrate rules of trade, mediation, disclosure, takeovers and mergers.

Due to the role of financial institutions and markets in developing a sound financial system, additional legislation is usually needed for their operations in addition to corporate law. These are prudential rules, especially for banks and similar financial institutions that hold an important part of the money supply, create money and intermediate between savings and investment. Corporate law is an example of the necessary legislation. It not only controls the operation of business enterprises, but also protects the business stakeholders. Therefore, disclosure of information about the company’s activities should be made mandatory for corporate governance in the relevant section of the Companies Act. Such information, in particular finance and accounting information, should also be legally subsequently verified and certified by auditors.

Supervision rules cover topics such as entry criteria (records), capital adequacy standard, asset diversification, individual loan restrictions, permitted range of activities, asset classification and disposal, portfolio concentration and enforcement powers, special accounting, audit and disclosure standards adapted to the needs of banks. ensuring timely availability of accurate financial information and transparency. The aim is to improve the security and health of the financial system.

There is a real need for important financial market legislation that requires not only favorable policies but also legal and institutional infrastructure to support their operations, prevent abuse and protect investors. Investor confidence is critical for market developments. Therefore, brokers, insurers and other intermediaries operating in these markets must follow established professional codes of conduct, enshrined in the legislation applicable to institutions such as financial and insurance companies, mutual funds and pension funds.

Another important issue is the independence of the regulatory authority, their number and the possibility of setting up a self-regulatory agency. All these aspects must take into account the objectives and principles set by the government and also the specific development needs of the financial system.

A key challenge for financial markets in the South African region is the harmonization of national economic regulation and compliance with international requirements, including the SADC criteria and international standards set by international organizations such as the International Organization of Securities Commissions (IOSCO), the International Accounting Standards Committee (IASC), the Basel Committee on Banking Supervision (BCBS) and the obligations arising from the WTO Financial Services Agreement (GATS). These important international instruments are beginning to be enforced, and individual countries must continue to update their financial markets rules and upgrade the technical skills of their regulatory and supervisory staff.


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